The antisocial mutual fund

Vice Fund: Politically incorrect and socially irresponsible?

DALLAS (CBS.MW) -- While some socially responsible mutual funds are out there trying to save the planet and others try to save your soul, one socially irresponsible fund is hoping to profit big from the wages of sin.

The new antisocial mutual, aptly dubbed the Vice Fund, targets the so-called sin stocks long eschewed by socially responsible investors and considered virtually "recession-proof" by its managers: tobacco, gaming, alcohol and defense stocks.

"We're not out there to do nothing but socially irresponsible investing, but the point of investing is to make money. ... That means investing in those markets that do well," said portfolio manager Eric McDonald, who co-manages the fund with Dan Ahrens.

The new fund is the latest product coming from investment adviser and mutual-fund broker Mutuals.com. The group has also been marketing its own Generation Wave fund-of-funds products, targeting specific risk tolerances.

Dancing with the devil

"It has been my experience that folks who have no vices have very few virtues," Abraham Lincoln is quoted as saying.

The quote is proudly displayed on the Vice Fund's promotional Web site, as is the portfolio's motto: "When it's good, it's very, very good. ... When it's bad, it's better."

Companies under consideration for the portfolio are some of the obvious choices for these sectors: In tobacco, Philip Morris
MO, +1.39%
; in defense, Raytheon
RTN, +0.10%
Boeing
BA, +0.71%
and General Dynamics
GD, +0.99%
; and, in gaming, Harrah's
HET
and MGM Mirage
MGG, +5.26%

While many of the companies will no doubt fall into the large-capitalization range, managers will also be looking hard at small-cap and midcap companies as well.

One small company showing up on McDonald's radar is cigarette maker Vector Group
VGR, +0.46%
which is developing smokeless cigarettes and testing reduced-carcinogen and nicotine-free cigarette products.

"That makes it very appealing, especially with the litigation that is out there for tobacco," McDonald said. "But even with tobacco, despite the litigation, it continues to do well. They can fund the reserves, and they can do what they need to do in order to continue growth."

When unsocial is not sinful

While tobacco, gaming, alcohol and defense may form the four pillars of the fund, McDonald suggested the portfolio might well hold companies that fall outside the vice format -- such as Microsoft
MSFT, +1.57%

"In my opinion, there's absolutely nothing socially irresponsible about Microsoft," McDonald said. "They're getting hit from all sides with antitrust [suits], but I think Microsoft is a very good bet -- despite the bad PR that they're getting from those activities."

He also expects to look at beaten-up oil and gas companies, stocks frequently under fire by so-called green funds, he said, as soon as he sees evidence that the sector is coming back into favor.

"Energy companies right now are getting absolutely hammered because of what happened with Enron, but I don't think anybody is expecting the United States to get off the electricity grid that we have right now and go to solar power and windmills," McDonald said.

Finding the light

Mutuals.com isn't the first to tread on unhallowed ground. Several years ago, Burt Morgan opened the Morgan SinShares fund with the idea of investing in anything habit-forming. The idea being, of course, that a hooked customer is a steady customer.

He later changed the name to Morgan Funshares
MFUN
at the urging of old friend and noted investor Sir John Templeton -- a man well-known for his religious convictions.

"They'll never make it, because they'll find out what I did," Morgan said of the new Vice Fund. "Sin isn't sellable, but fun is -- but let them find out the hard way. Don't tell them."

While Morgan's not added to his tobacco and alcohol positions since the name change, the early shares remain as part of his buy-and-hold philosophy -- and have really helped the fund in this down market, he acknowledged.

Habit-forming products still are a cornerstone of the fund, but they're definitely less sinful in nature. Food is one such area that consumers can't seem to live without. Go figure.

"The world's No. 1 habit-forming commodity isn't tobacco or alcohol; it's food," said Morgan, who boasted of being the largest shareholder of food packager Bemis
BMS, +0.93%
which traded at just $30 a share six months ago and now sells for $50.

Vice doesn't have to be bad

Like houses of ill repute, big casinos and the mafia, the Vice Fund hopes to clean up its image by contributing some of its profits to worthwhile causes -- though the amounts or designated charities have as yet to be decided.

While the vast majority of companies in the fund are liable to send socially responsible screening tools spinning, such as Crosswalk.com's Investigator, which screens mutual funds for companies the fundamentalist Christian Web site finds morally repugnant -- such as "anti-family-entertainment" Disney -- portfolio managers McDonald and Ahrens said there's no sin in turning an honest buck.

"The crux of this is that these are really great sectors to invest in. Despite all the gimmicks, despite all the hype, we're deadly serious about the performance of the fund and the performance of these sectors and what we think we can do with our investors' money," McDonald said.

The Vice Fund is currently raising assets through subscription at $10 per share. Interested investors can purchase advance shares directly from Mutuals.com. The minimum investment is $2,500.

When the fund officially opens Sept. 3, assets will initially be invested in 40 to 50 sin stocks, with the hope being that the portfolio size will be upped once asset levels can support it. The fund is also expected to be available through most mutual-fund supermarket channels after its launch.

The no-load portfolio has capped fees at 1.75 percent, but investors who seek "redemption" from the wages of sin can expect to pay a 2 percent penalty in the first six months.

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